Entrepreneurship lecture 13

8/11/2019 Entrepreneurship lecture 13

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Copyright © 2008 by Nelson, a division of Thomson Canada Limited

ENTREPRENEURSHIP

A PROCESS PERSPECTIVERobert A. BaronScott A. Shane

A. Rebecca Reuber

Slides Prepared by:

Sandra Malach, University of Calgary



Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

13WHEN – AND HOW – TO

HARVEST THE REWARDS

FROM YOUR BUSINESS

1




LEARNING OBJECTIVES1. Describe basic methods of valuing a business,

including balance sheet methods, earnings-basedmethods, and market method.

2. Describe issues entrepreneurs should considerwhen transferring ownership of their companies tofamily members or employees.

3. List the advantages and costs of an initial publicoffering.

4. Describe the basic nature of negotiation andexplain the nature of several key bargaining tactics.




LEARNING OBJECTIVES5. Explain why integrative agreements between

negotiators are generally best, and explain therelationship of such agreements to the overallapproach to negotiation (a win-lose versus a win-win approach).

6. Define “life transitions” and explain whyentrepreneurs should consider their own age and

phase of life before choosing an exit strategy.






EXIT STRATEGIES Entrepreneurs‟ attitudes, values & goals

determine the harvest strategy:

Sell or transfer ownership to insiders

Sell or transfer ownership to outsiders

Take the company public through an IPO




FACTORS IN TERMS OF

THE SALE Valuation of the company

Value of intangible assets & goodwill

Entrepreneurs often over estimate the value

Negotiation process




WHAT‟S IT WORTH? Balance sheet methods

Earnings methods

Market method






EARNINGS METHOD Excess Earnings Method

Estimates the extent to which a company

will generate earnings in excess of theindustry average = goodwill

Capitalized Earnings Method Net earnings are capitalized

Discounted Future Earnings Future earnings are discounted for time.




MARKET METHOD Compare the price/earnings ratio of the

business to that of other publicly traded

companies in the same industry. Problems:

Identifying several, similar public

companies Concept of comparing public and private

companies.




FAMILY SUCCESSION Reasons for family

succession: Family has helped build the

business

Family owns large blocks ofshares

Trust & confidence of

entrepreneur Key goal was to build

something of value forchildren




SUCCESSION ISSUES The #1 issue of family firms

Adopt a clear Succession Plan How, when & to whom ownership will be

transferred

Characteristics of successors:

Desire to have an active role Suited for the task

Have a post-succession vision




SALE OR TRANSFER TO

EMPLOYEES Cash

Leveraged buyout

Employee stockownership plan




LEVERAGED BUYOUTS Managers borrow money to pay the

owner an agreed-upon price.

The new owners pledge their stock ascollateral, or…

Lenders accept an equity position in the

company to cover part or all of thefunds.




EMPLOYEE STOCKOWNERSHIP

Ordinary ESOP

Leveraged plan

Transfer ownershipplan




SALE TO OUTSIDERS

Possible buyers:

Competitors

Non-competitors

Acquisition by a larger company

Manufacturing and distribution systems

Economies of scale & scope




PREPARING FOR SALE

Sell at the right stage of development

Sell when the business cycle is strong

Compensate for loss of talent

Identify and protect intellectual property

Adopt transparent and conservative

accounting policies Resolve open questions that make it difficult

to estimate value




INITIAL PUBLIC OFFERINGS

Generates huge amounts of $$$$$.

$$ for expansion

Gain respectability increasingcompetitive advantage

Market provides continuous valuation

Easier to use stock options as anemployee incentive




Disadvantages of IPOs

A tremendously expensiveprocess

Time and $$$ Lock-up agreements

Initial under-pricing of shares

Subject to careful continuousscrutiny by regulators




FOUR PHASES OFIPO ACTIVITY

1. Prepare for L-Day (listing day). Accountants

2. Preparation of IPO Documentation Lawyers, underwriters & accountants

3. Road show

Top Management4. Constant flow of information to

analysts & investors




NEGOTIATION

Opposing sides exchange offers,counteroffers, and concessions.

If successful, an agreement acceptable toboth sides is attained

If negotiations fail, the process ends and

each side seeks other parties with whom tomake a deal




BARGAINING TACTICS

1. Beginning with an extreme initial offer

2. Using the “big lie” technique

3. Convincing the other side you have an “out”




UNETHICAL NEGOTIATIONTACTICS

The MOST objectionable tactics:

False promises

Misrepresentation

Inappropriate information gathering

Using them may work in the short run

but may prove costly over a long periodof time




OTHER TACTICS

Make relatively unimportantconcessions

Induce a positive effect Location & atmosphere




APPROACH TO NEGOTIATION

Two basic approaches:

1. Win-Lose

Gains by one are the losses of the other

Assumes incompatible interests

2. Win-Win

Negotiations can maximize the outcomeof both sides




REACHING INTEGRATIVE AGREEMENTS

Logrolling

Nonspecific compensation

Broadening the pie Cost-cutting

Bridging




RESULTS OF NEGOTIATION

Obtain a favourable agreement

Avoid inducing feelings of anger,

resentment, or outrage by the otherparty




HARVEST STRATEGIES

Exiting the business for any reason

„I am a free man, I feel as light as afeather‟

No single harvest strategy is best for allentrepreneurs




THE AGING PROCESS

Physical appearance and energy

Cognition and memory

Intelligence

Creativity



Copyright © 2008 by Nelson a division of Thomson Canada Limited

ERAS OF OUR LIVES

Age 30 transition

Midlife transition (40-45)

Late-adult transition (50-55) Consider your stage in life as you

consider your exit strategy

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Entrepreneurship lecture 13

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